New Zealand Professional Investment Services Firm

Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

Vital Healthcare Property Trust / Equity Bottom-Up

<h2>Vital Healthcare</h2>
1Q2<a target="_blank"></a>0 — Vital Signs
Vital Healthcare (VHP) provided its 1Q20 update, highlighting modest property income growth and continued strength in its very defensive portfolio. Following the recently approved management fee structure, VHP delivered a key direction change in its management fees with a material reduction in incentive fees (c.-46%) in 1Q20. Our rating remains OUTPERFORM and we have not changed our forecasts.
Portfolio continues to perform
As at 30 September 2019 (1Q20), VHP had 99.9% occupancy and a 17.9 year WALT, generating underlying net operating income growth of +2.6% for the three months to 30 September 2019. The 50 bps increase in occupancy was a result of a newly secured 1,000 sqm lease at Gold Coast Surgery Centre.
Development updates
VHP detailed that it currently has five fully debt funded projects under construction with a total cost of NZ$284m. The majority of the spend is apportioned to stage one of the Wakefield hospital project in Wellington, expected to be completed by early 2021 at a cost of NZ$37m, whilst the 14 level East Wing tower project at VHP’s Epworth Eastern campus in Melbourne is entering its next phase. Upon completion, Epworth Eastern campus is expected to have a value of c.A$350m. At a 3% cost of debt and expected blended return on cost of 6.1%, these projects are expected to be return and earnings accretive by FY21.
Figure 1. Development Progress
<table class="table table-striped">
<thead>
<tr>
<td style="width: 148.85pt;">
Development
</td>
<td style="width: 42.55pt;">
Project cost (NZD$m)
</td>
<td style="width: 49.6pt;">
Spend to date (NZD$m)
</td>
<td style="width: 60.6pt;">
Forecast completion date
</td>
</tr>
</thead>
<tbody>
<tr>
<td style="width: 148.85pt;">
Lingard Day Surgery (NSW)
</td>
<td style="width: 42.55pt;">
28
</td>
<td style="width: 49.6pt;">
18.9
</td>
<td style="width: 60.6pt;">
Mid 2020
</td>
</tr>
<tr>
<td style="width: 148.85pt;">
Epworth Eastern Tower Expansion (VIC)
</td>
<td style="width: 42.55pt;">
136.1
</td>
<td style="width: 49.6pt;">
14.7
</td>
<td style="width: 60.6pt;">
Late 2021
</td>
</tr>
<tr>
<td style="width: 148.85pt;">
The Hills Clinic (NSW)
</td>
<td style="width: 42.55pt;">
9
</td>
<td style="width: 49.6pt;">
1.9
</td>
<td style="width: 60.6pt;">
Mid 2020
</td>
</tr>
<tr>
<td style="width: 148.85pt;">
Wakefield Hospital - Stage 1, NZD$37m (WLG)
</td>
<td style="width: 42.55pt;">
98
</td>
<td style="width: 49.6pt;">
11.8
</td>
<td style="width: 60.6pt;">
Staged 2021-23
</td>
</tr>
<tr>
<td style="width: 148.85pt;">
Royston (Hawkes Bay)
</td>
<td style="width: 42.55pt;">
13
</td>
<td style="width: 49.6pt;">
4
</td>
<td style="width: 60.6pt;">
Mid 2021
</td>
</tr>
<tr>
<td style="width: 148.85pt;">
Total Projects
</td>
<td style="width: 42.55pt;">
284.1
</td>
<td style="width: 49.6pt;">
51.3
</td>
<td style="width: 60.6pt;"></td>
</tr>
</tbody>
</table>
Source: Forsyth Barr analysis, Company Reports
Annual Meeting results — Trust Deed and Management Fee Alterations
At the annual meeting held 31 October 2019, unitholders unanimously approved amendments to the trust deed including long awaited changes to VHP’s management fee structure.
Additionally, in line with the FY20 dividend guidance reiteration of 8.75 cpu, VHP declared its 1Q20 dividend of 2.1875 cpu to be paid on 19 December 2019.&nbsp;
<div class="content-highlight">
Investment View
VHP remains one of our preferred LPV exposures given (1) it has a defensive portfolio underpinned by a sector-leading WALT (17.9 years), a high proportion of structured rental reviews (~90%) and no major near-term expiries, (2) has an attractive long-term macro outlook with an ageing population and improving healthcare technology. Governance issues have overhung VHP and it is now, hopefully, time for back to basics and for VHP’s high quality portfolio to do the talking. Our rating is OUTPERFORM.&nbsp;
</div>
Jeremy Simpson, CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Vital Healthcare
1Q20 — Vital Signs
Vital Healthcare (VHP) provided its 1Q20 update, highlighting modest property income growth and continued strength in its very defensive portfolio. Following the recently approved management fee structure, VHP delivered a key direction change in its management fees with a material reduction in incentive fees (c.-46%) in 1Q20. Our rating remains OUTPERFORM and we have not changed our forecasts.
Portfolio continues to perform
As at 30 September 2019 (1Q20), VHP had 99.9% occupancy and a 17.9 year WALT, generating underlying net operating income growth of +2.6% for the three months to 30 September 2019. The 50 bps increase in occupancy was a result of a newly secured 1,000 sqm lease at Gold Coast Surgery Centre.
Development updates
VHP detailed that it currently has five fully debt funded projects under construction with a total cost of NZ$284m. The majority of the spend is apportioned to stage one of the Wakefield hospital project in Wellington, expected to be completed by early 2021 at a cost of NZ$37m, whilst the 14 level East Wing tower project at VHP’s Epworth Eastern campus in Melbourne is entering its next phase. Upon completion, Epworth Eastern campus is expected to have a value of c.A$350m. At a 3% cost of debt and expected blended return on cost of 6.1%, these projects are expected to be return and earnings accretive by FY21.
Figure 1. Development Progress




Development


Project cost (NZD$m)


Spend to date (NZD$m)


Forecast completion date






Lingard Day Surgery (NSW)


28


18.9


Mid 2020




Epworth Eastern Tower Expansion (VIC)


136.1


14.7


Late 2021




The Hills Clinic (NSW)


9


1.9


Mid 2020




Wakefield Hospital - Stage 1, NZD$37m (WLG)


98


11.8


Staged 2021-23




Royston (Hawkes Bay)


13


4


Mid 2021




Total Projects


284.1


51.3





Source: Forsyth Barr analysis, Company Reports
Annual Meeting results — Trust Deed and Management Fee Alterations
At the annual meeting held 31 October 2019, unitholders unanimously approved amendments to the trust deed including long awaited changes to VHP’s management fee structure.
Additionally, in line with the FY20 dividend guidance reiteration of 8.75 cpu, VHP declared its 1Q20 dividend of 2.1875 cpu to be paid on 19 December 2019.&nbsp;

Investment View
VHP remains one of our preferred LPV exposures given (1) it has a defensive portfolio underpinned by a sector-leading WALT (17.9 years), a high proportion of structured rental reviews (~90%) and no major near-term expiries, (2) has an attractive long-term macro outlook with an ageing population and improving healthcare technology. Governance issues have overhung VHP and it is now, hopefully, time for back to basics and for VHP’s high quality portfolio to do the talking. Our rating is OUTPERFORM.&nbsp;

Jeremy Simpson, CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Vital Healthcare Property Trust

Vital Healthcare: 1Q20 — Vital Signs